Fake tweet erasing $136 billion shows markets still need humans

A false report of explosions at the White House that wiped out $136 billion from the Standard & Poor’s 500 Index in about two minutes highlighted the risks of the computerized trading that dominates the $18 trillion market.

The S&P 500 was up about 1% at about 1,578 at 1:07 p.m. New York time today when a posting on the Associated Press Twitter account said there had been explosions at the White House and President Barack Obama had been injured. The benchmark gauge for American stocks erased almost the entire gain, falling as low as 1,563.03 by 1:10 p.m. The index recovered from the plunge within three minutes as the news service said its Twitter account had been hacked and there were no explosions.

“Trades should not be busted,” Rick Fier, director of equity trading at Conifer Securities LLC in New York, said in a interview. His firm oversees $8 billion in assets. “No human believed the story. Only the computers react to something that serious disseminated in such a way. I bought some stock well and did not sell into it. Humans win.”

Exxon Mobil Corp., Apple Inc., Johnson & Johnson and Microsoft Corp. briefly lost about 1% in two minutes before rebounding. The plunge didn’t trigger circuit breakers for individual stocks. Shares for most companies pause for five minutes if they lose 10% in five minutes.

Nasdaq OMX Group Inc. doesn’t comment on market moves, Robert Madden, a spokesman for the exchange operator, said by phone. Richard Adamonis, a spokesman for NYSE Euronext, declined to comment. Molly McGregor, a spokeswoman for New York-based International Securities Exchange LLC, and CME Group Inc. spokesman Michael Shore declined to comment. Chicago-based CME is the world’s largest futures exchange.

Dow’s Loss

The Dow Jones Industrial Average retreated about 145 points before recovering. Other markets briefly retreated and then recovered losses. Canada’s S&P/TSX Composite Index slid 0.3% and Brazil’s Bovespa lost 0.5% in the minutes after the Twitter post.

“It’s one thing for an illiquid stock to do that but how does a multi-trillion dollar market do that?” Walter Todd, who oversees about $940 million as chief investment officer of Greenwood Capital Associates LLC in Greenwood, South Carolina, said in a telephone interview. “That’s very disturbing to me. It’s unnerving.”

Traders said the selloff may have been exacerbated by so-called stop-loss orders, which are placed by investors to automatically sell stocks when declines of a specified threshold are reached.